Benchmark equity indices fall by nearly 15% in a week, there are rumours of a run on a leading bank and gold prices touch a new high every other day even after gaining 30% in a year, and at a time when leading central banks of the world come together to cut interest rates – these are testing times.
Clearly, sitting about and waiting for things to improve and the dust to settle down, might not be a good idea. Yes, India is quite insulated from the vagaries of the global financial world, but it will surely feel its ripple. A lot of the dynamics that were present a year ago have vanished. Hence a re-look at your personal finance plan is due. And here are a few things that experts have advised.
Don’t panic
Just like when the markets were in the 20,000 levels there was a mad rush to buy equities when they all looked overvalued, now there is a tendency to sell-off when they look attractive. “When the market was at 20k levels, we thought India was expensive and not cheap. We expected it to come down to 15,000 levels. However, this is a much lower level,” reckons Ajit Dayal director with Quantum Asset Management. So at these levels, the market does look attractive.
Selling off stocks just because you have been told that the markets would tank further might not be a smart idea. Unless you are a trader and want to pick these stocks at a lower level and take a bet on timing the market. Yes, selling off stocks to fund your business plans or any other family requirement or exigency is another thing.
Also, panicking to move cash out of the bank and buying gold, expecting the Indian banks to collapse, might be a tad too radical. Indian banks are well capitalised, unlike some of the overseas banks. And thanks to some strong regulations, are not exposed to drastic risks that other banks in developed countries had. Yes, there is a crisis and that is one of liquidity rather than credibility, says an analyst with a leading fund house. It is time to panic when both liquidity and credibility are hit.
The government has taken steps in this direction and liquidity will improve in the times to come. And yes, there will be certain banks that will take a hit on their profitability. And that is completely different from banks going down.
Take stock
This is also a good time to take stock. Visiting your wealth manager or financial planner would be a good idea. At this time, it would be better to deal with personal goals and objectives rather than return numbers. This is one of the mistakes people make when dealing with wealth managers, say experts. “And it is natural, because everybody has seen good times for the past several years and have been accustomed to strong returns. Capital preservation was not an issue, but now it is and it will take some time for the mindset to change,” says KK Hedge, an independent financial advisor. Also, many are not used to the planning process and with more education they would work on personal goals and objectives, he adds.
So objectives and goals like children’s higher education, business expansion, daughter’s marriage and overall protection should be considered and not just the doubling of money in a certain number of years. “It would also be a good time to rationalise expectations,” Hedge adds. “Many times clients come asking me by when will my money be doubled and even bargain saying that some brokers have promised them a six-month time frame,” he says.
Manage debt
Mortgages are not necessarily investments, says Vedprakash Bhatt, a certified financial planner. There are a lot of people who, during the low interest rate period have bought property by taking housing loans. And now those loans are pinching. This might be the right time to repay these loans and stay hassle free. In fact, paying off your credit card bills would be an excellent idea, reckon most of the experts. Credit card companies, in such times, often charge high interest rates and many of them are not known to you. So please look at your credit card bills closely next time and you could well be in for a surprise.
Systematic savings
Remember the time when you felt morose about having probably missed the equity rally. Well, this could be your time to catch it. The India story, even if numbers tell you that there would be a global recession, is stronger than many others. And, equities are bound to do better than many asset classes. Hence, having a systematic plan is very important. Please do not stop your systematic investment plans, in fact start a few more, say experts. Having a systematic investment plan will allow you the benefit of averaging and in times like these you can accumulate much more than before. Some of the stocks are at their lifetime lows and this does not happen often.
Dayal says that they follow a ‘barbell’ investment technique, where investments are made at both the ends of the risk and reward curve. Meaning, at one end of the high risk and high reward spectrum would be the equity investments and at the other end would be secure investments like gold and safe debt instruments. He recommends that 80% of the investments must be made in equities, around 15% in gold and 5% in liquid and safe debt instruments. The reasoning is that if the market goes down from here on due to a full-scale panic, then gold prices will rise rapidly and your portfolio will be protected. If the market improves then your portfolio will anyways do better.
Think long-term
The ones who will come unscathed out of this crisis are the ones who have a long-term plan on hands. The scarred ones are those who played for short-term gains. The stock market has a history of volatility but over the long-term these smoothen out. The equity market will provide you with a return that is a bit higher than the nominal GDP growth, reckon experts. And that will always protect your investment. The days of taking quick gambles and leveraging (borrowing) to play the markets are over. Thousand point swings in the midst of global uncertainty is an adventure many can refrain from. Chose your equities and even funds based on a three to four year view and you will notice that this might actually be the right time to invest and not panic.